Morocco - Industrial incentives and export promotion

Report No. 4893-MOR Morocco Industrial Incentives and Export Promotion latwary 11, 1984 Country Programs Department 11 Europe, Middle East and North A rica FOR OFFICIAL USE ONILY Document of the World Bank This document has a restricted distribution and may be 4ised by recipients only in the performance of their official duties. Its contents rnay not otherwise be disclosed without World Bank authorization.  KINGDOM OF MOROCCO INDUSTRIAL INCENTIVES AND EXPORT PROMOTION CURRENCY EQUIVALENT Currency Unit: Dirham (DH) OFFICIAL EXCHANGE RATE: DIRHAM (DH) PER US DOLLARS 1971 5.0481 1977 4.5034 1972 4.5959 1978 4.1667 1973 4.1069 1979 3.8991 1974 4.3698 1980 3.9367 1975 4.0525 1981 5.1723 1976 4.4193 1982 6.0230 FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS BdM Banque du Maroc (Bank of Morocco) BNDE Banque Nationale Pour le D6veloppement Economique (National Bank For Economic Development) CIH Cr6dit Industriel et H8telier (Housing Finance) CNCA Caisse Nationale de Credit Agricole (Agricultural Credit Bank) DRC Domestic Resource Cost EPC Coefficient of Effective Protection ESC " " " Subsidy IBP Impot sur les benefices Professionnels (Easiness profit tax) MCIT Ministere du Commerce, de 1'Industrie et du Tourisme (Ministry of Commerce, Industry and Trade) OCE Office de Commercialisation et d'Exportation (Office for Exports and Marketing) OCP Office Cherifien des Phosphates (Morocco's Phosphate Company) TPS Taxe sur les Produits et Services (Sales Tax)  FOR OFFICIAL USE ONLY TITLE: INDUSTRIAL INCENTIVES AND EXPORT PROMOTION ;.OUNTRY: MOROCCO REGION; nUROPE, MIDDLE EAST AND NORTR AFRICA SECTOR: COUNTRY ECONOMIC REPORT TYPE CLASSIF. MM/YY LANGUAGES Economic Restricted 01 83 English/French PUBDATE: ABSTRACT: The report analyses the development of Morocco's manufacturing sector. It reviews the system of industrial incentives (particularly exchange rate, tariffs, quotas and export promotion measures), taxation and the financial sector. The report focusses on improving the effectiveness of import-substitutiorn policies, export incentives and the mobilization and allocation of financial resources. Estimates of the economic and financial impact of the recommended changes in Morocco's system of incentives are provided in the report. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOREWORD This report has been prepared by an economic mission that visited Morocco in September 1982. The mission was composed of Messrs. Bela Balassa (Chief of Mission), Rend Bonnel (Deputy Mission CiLief, incentives and protection). -..:el Mateus (taxation and industrial development), Jose da Silva Lopes (consultant, industrial financing), and Brendan Horton kconsultant, effective protection and domestic resource cost). The report also incorporates studies made by the incentives unit of the Ministry of Commerce, Industry and Tourism, and in particular the conclusions of Mr. Brendan Horton's study on the structure of incentives in the industrial sector.  KINGDOM OF MOROCCO INDUSTRIAL INCENTIVES AND EXPORT PROMOTION Table of Contents Page MAP COUNTRY DATA CONCLUSIONS AND RECOMMENDATIONS i - xxi CHAPTER I. INDUSTRIAL DEVELOPMENT AND EXPORTS I A. The Balance of Payments Effects of External Shocks and of Policy Responses to these shocks 1 B. The Place of Manufacturing in Morocco's Economy 4 C. Structure and Development of Manufacturing Industries 12 1. Sectoral composition 12 2. Size distribution 12 3. Employment, labor productivity and wage rates 13 4. Capital stock, capacity utilization, capital intensity and productivity of capital 15 5. Public and private industry 18 6. Regional distribution 18 7. Composition ar.d growth of manufacturing imports 18 8. Structural analysis: linkages, labor content and - port content 20 9. Structure :nd evolution of exports, 1969-81 27 D. Exort Prospects and Constraints 31 1. Food products 31 2. Manufactured products (non-food) 35 CHAPTER II. THE PRODUCTION INCENTIVE SYSTEM 47 A. Exchange Rate Policy 53 B. The Incentives System and Its Effect on the Production Structure 53 1. Effect on agriculture and the manufacturing sector, 1968-81 53 2. Export incentives and import substitution in 1978 58 C. Effects of the Compensated Devaluation on the Balance of Payments. Growth, Employment and the Budget 63  Page D. Tariff and Nontariff Protection 75 l. Origins of the protection system 76 2. Structure and level of tariff and nontariff protection 77 3. Effective protection and domestic resource cost in the manufacturing sector 81 E. Price Controls 86 F. Export Promotion 89 1. Administrative Procedures 90 2. Exemption from tax on profits (IBP) 91 3. Exemption from customs duties and indirect taxes 94 4. Exemption from the tax on goods and services (TPS) 96 5. "Statistical tax" on exports 97 6. Foreign exchange allocation 97 7. International transportation 97 8. Public works 98 9. Development of trading companies 98 CHAPTER III. TAXATION AND INDUSTRIAL INCENTIVES 99 A. The Tax System 99 B. Income Taxes 101 1. Personal income tax 101 2. Direct taxes on industrial firms 105 3. Reform and incidence of indirect taxes 113 4. Comparative analysis of investment codes: fiscal and financial incentives and distortions of factor prices 118 5. Direct action: public sector investment programs 126 CHAPTER IV. THE FINANCING OF INDUSTRY 134 A. Mobilization of Financial Resources for Investment 1. The investment-savings gap 134 2. Structure of national savings 135 3. Stimulation of financial savings 137  Page B. Industrial Credit 148 1. Financial resources of industrial firms 148 2. Medium and long-term financing of industry 150 3. Interest rate levels 155 4. Interest subsidies 157 5. Floating interest rates for medium and long-term lending 158 6. Partial refinancing of interest rates 159 C. Export Credit 159 1. Introduction 159 2. Prefinancing of exports 160 3. Short-term export credit 163 4. Medium and long-term export credit 164 5. Protection against exchange risks 166 6. The export credit insurance system 167 7. Annex: Example of the Operation of a Forward Exchange Rate System 169 AINNEXES Protection 172 - Regressions 191 - Taxation 199 - Statistical Annex 202 - Standard Tables 212  Page I of 2 COUNTRY DATA MOROCCO Population in 1982s 20.4 million Po2ulation Characteristics (19791 Education (1979) Crude birth rate (per 1,000) 44.9 Adjusted school enrollment ratio Cruae death rate (per 1,000) 12.8 Primary 72.0 Gross reproduction rate (Z) Secondary 20.0 Total 1971-78 3.2 Adult literacy rate (W) 28.0 Urban 1971-78 4.6 Urban population (Z of total) 39.9 Housing and Consumption (1979) Age structure (ci) 0 to 14 years 46.3 Access to electricity 15 to 64 years 50.4 (S of all dwellings, urban areas, 1971) 65.0 65 years and over 3.3 Access to safe water (% of population) 55.0 Energy consurnplion per capita Health and Nutrition (1979) (Kilograms of coal equivalent) 307.9 Radio receivers per thousand population, 87.4 Population per physician 11,037 Passenger cars per thousand population 19.6 Population per hospital bed 774 Average size of household 4/ 5.5 Per capita calories supply as Average number of persons per room 4/ 2.4 Z of requirements 105.0 Per capita protein supply (grams per day) 67.0 LtZe expectancy at birth 56.3 GNP per Capita in 1982: $820 National Accounts Mjillion $ Share ir. Annual increase (%) 1982 GDP-1982 1975-80 1980 1981 1982 Gross domestic product _/ 14,697 100.0 5.6 3.6 -1.3 5.6 Agriculture 2,661 18.1 4.5 6.1 -22.9 19.0 Industry 4,564 31.1 4.8 -2.5 -0.1 -0.5 tiervices jf 6,438 43.8 7.0 6.4 3.0 6.5 Consumption 13,526 92.0 6.4 2.5 n.a. n.a. Gross tnvestment 3,401 23.1 -1.2 -7.3 n.a. n.a. Exports of goods and non-factor services 2,969 20.2 5.0 3.6 0.4 3.8 Imports of goods and non-factor services 5,199 35.4 1.7 -9.8 10.2 5.5 Gross national savings 1,502 10.2 -4.4 6.0 n.s. n.a. gEployment and Proauctivity (1977) Employment Value added per worker (in thousands) () 1dollars) (X Agriculture 2,099 43.5 806 39.6 Industry 896 18.6 3,855 189.4 Services 1,248 25.9 3,747 184.1 Unclassified 190 3.9 - - Unemployed 394 8.1 - - Total 4,827 100.0 2,035 100.0 Uovernment Finance Millions of Dirhams % of GDP 1979 1980 1981 1982 1979 1980 1981 1982 Current revenues 13,802 15,193 17,838 20,480 22.3 21.7 23.3 23.1 Current expenditures 12,073 15,310 18,898 20,390 19.5 21.8 24.6- 23.0 Current surplus (+) or deficit (-) 1,729 - 117 -1,060 +90 2.8 0.2 1.4 0.1 Extrabudgetary transactions (net) 1,018 1,172 - 426 1,283 1.6 1.7 0.6 1.5 Capital expeciditures 3/ _9,016 -8,565 -9,612 -12,481 14.5 12.2 12.5 14.1 OveraLl deficit -6,269 -7,601 -10,672 -12,391 10.1 10.8 13.9 14.0 External borrowing and grants 4,016 3,911 7,116 n.a. 6.5 5.6 9.3 n.a. 1/ At market prices. 2/ Exclude imporc taxes. I/ lncluding military equipment. 4/ 1970 data. ID.05991 12/27/83 .^; R h,#n - e X S RS